The Global Boardroom Review – Day 1

Thursday marked the end of the Financial Times’ “The Global Boardroom”. It is a global digital conference that gathered leaders in policy, business, tech and finance on May 12-14 for three days of online conversations with top FT journalists on the economic impact of the pandemic. It summarised the interesting insights and conversations from those on the forefront of leadership for large businesses and economic policy decisions in the UK and across the world.

The sessions seemed to have a very different feel compared to what it is like attending a congress in person. Firstly, we had the speakers join from their homes and thus bookshelves and couches were a standard view in the background. Communication between the audience and the panel were done through a Q&A vote system where the most popular question is asked from the speakers. Finally, the FT has done a great job at making the sessions very interactive as during certain debates a poll is activated for the question that is discussed to see what the audience think overall. However, the experience might be different to what we are used to, but the expertise and the information relayed is as exciting as ever.

Ryanair's Michael O'Leary under fire for comments on Muslim men

How can airlines fly out of the danger zone?

Michael O’Leary – CEO, Ryanair

Do you still plan to be back to 80% volume levels as predicted recently?

  • 14-day isolation measures are described as ridiculous by the CEO. It takes out the effect of all the measures that are in place at airports such as facemasks and temperature checking.
  • They expect 40% of volumes back by July mainly as there’s already a surge of demand by families as there’s an increasing need for a holiday.
  • Potentially 60% by August, 80% by September seems like a push.
  • The focus now is on how to get the people back to work who need to fly.

What is flying going to look like as we get back onto airplanes?

  • Having protection such as face masks are good measures to return to normality. By July mask and temperature checks will become the norm for undergrounds, trains and buses.
  • Pricing will return and we expect to see a lot of stimulatory pricing, this is done as airlines and hotels are trying to rescue summer season as much as possible and sell to customers.
  • Competing against air France, air Italia who are getting a lot of state aid will be a challenge for Ryanair as the aid allows these airlines to sell below cost.
  • Consumers will see low prices and by summer 2021 prices will seem to get back to normal.

UK hasn’t provided an aviation package, should they?

  • French, Italians and Germans have provided an aid package, but actually most central Europeans haven’t.
  • Ryanair is already legally challenging against Sweden and French paying back tax to only French airlines which is a big problem for competition.
  • “Illegal” state aid can lead to breach of competition, helping local firms but then not foreign airlines.

Refunds not getting to people, what can you do?

  • Michael O’Leary thinks that the Civil Aviation Authority (CAA) has no sense of the scale of the problems that airlines are currently facing.
  • Before the crisis about 10,000 refunds could be processed a month, the team for this has been reduced by about  25% now due to layoffs and working from home. Ryanair has had 50mil refund requests as the flights have been grounded and costumers want their money back.
  • At the rate the they can carry out refunds currently it is going to take a long time to fix the backlog.
  • Difficult processing takes time due to third parties issuing those tickets which they have to verify for each refund. EU commission are talks for allowing a 12-month buffer for these refunds.

Are you expecting changes to be implemented by aircraft manufacturing to help travellers feel safer?

  • Cabin crew will be wearing masks and using the toilet will be one by one, so that contact with others is minimised.
  • Redesigning the layout of aircraft isn’t an option as it takes years to develop new aircraft and that’s not the solution.
  • Summer 2021 should expect a strong traffic growth as people will want to get away from home. Similar public response expected as with to Spanish flu, people travelled a lot a year later. Hotels will also be discounting their products to get their summer season in 2020 back as much as possible.

IMF selects Bulgarian Kristalina Georgieva as new chief | News ...

What can the IMF do to support distressed economies?

Kristalina Georgieva – MD, IMF

“Hate and fear has the loudest voice.”

Is the double emergency fund, 1tr fire power enough? How do you interpret US blocking proposal of “special drawing rights”?

  • Kristalina told us that the IMF is deploying resources with speed and impact to countries that need it the most. So far, they have had to aid 50 countries, where weaker countries are at the highest risk. This is because weak economies are hit hardest by the economic shock, which can cause the tripling the concessional financial capacity.
  • It is important to bring down the debt burden on the weak economies and so, with the world bank, they are working to reduce the debt in poorer countries.
  • But the IMF has debt relief of its own: for the next 6 months there’s going to be guaranteed, no fund payment which can be used to help vulnerable economies. They are looking to expand these 6 months to two years.
  • IMF will play its role as the centre of the global financial safety net.

How many defaults will we see in EM this year?

  • There’s some good news: most countries have buffers especially after the Great Financial Crisis (GFC). Emerging Markets (EM) have had good reserves and capacity during the good times in preparation for a ‘rainy day’.
  • The IMF isn’t the only one that helps, countries helping themselves can do a lot more. The IMF concentrates on understanding the protection measures that can be offered that helps countries but making sure the liquidity issues aren’t turned into a problem.
  • Kristalina thinks that traditional fiscal and monetary instruments can act early and prevent as many defaults as possible.
  • However, she is also concerned about debt sustainability. Some countries didn’t use the good times to prepare for bad times and as a result they will need to be helped. The key takeaway for countries after this crisis is to understand the importance to build strength whilst in good times.
  • She also explained that Argentina is facing a duel crisis: corona and debt crisis. It is a long-standing tradition for the IMF to not discuss debt and leave to between the creditors. But at this point it is simply not sustainable.
  • The IMF acts as a lender of last resort to give a chance to economies a change to succeed. Now looking forward, in Argentina they want to do the right thing for the people and the economy.

How do you assess the situation in the EU, German court adding to risks?

  • “Hate and fear has the loudest voice.” We don’t quite hear the other voices are actually comforting the people in this crisis that is a key to keeping people together.
  • The IMF will do much as possible to bring the world together. But this takes time for the EU especially when the sovereign nations have different interests.
  • Nevertheless, Kristalina sees EU coming trough he crisis and doing good. For example, bringing people together for vaccines, with the confidence that the ECB will operate within its mandate properly transmitting its actions according to the jurisdictions. This is important for the whole world, when strong economies take action they result in positive result in EM.
  • She goes onto explaining that in March we were concerned for flight to safety of EM. $1tr of outflows too place from EM in one month. But liquidity by the Fed, ECB and BOE has lifted up the overall liquidity in the world and now we can see a reversal in EM with good fundamentals at reasonable yields what helps EM and helps the whole world through this time. The central banks seem to have a responsibility past their borders as well as serving the businesses within their nation/jurisdiction. ECB going beyond just the EU zone is very important in this potential recovery worldwide.

Will IMF consider issuing bonds such as pandemic bonds into the secondary market like the World Bank? This would allow IMF to tap on private investors to help.

When the world bank wants to take action, they go to the market and issue bonds, the IMF however doesn’t do that. The IMFs strength comes from the capacity to borrow, own and lend which is a different way of protecting the world economy. The IMF has a large scale financing $1tr cushion for EM and DM based on the members and the capacity to transmit lending from strong economies to those who need the support.

There has been a shocking lack of global coordination in managing the crisis. Do we need to revisit global institutional architecture following this crisis?

  • We all have to focus on working together and take lessons from this event for the future. If we want a better world, we have to take this as an opportunity.
  • Recovery addresses problems we face as a world: It addresses unsustainable growth and other problems that where already here before the virus.
  • It would be great if the IMF could come through the crisis as one that builds a better world.

UniCredit to Cut 8,000 Jobs, Launch Buyback - WSJ

Banking through the crisis: facing down the ultimate stress test

Jean Pierre Mustier – CEO, UniCredit

Ahmed Abdelaal – CEO, Mashreq Bank

Dame Jayne-Anne Gadhia – Founder and Executive Chair, Snoop

William Chalmers – Executive Director and CFO, Lloyds Banking Group 

Countries can structure the future but can do nothing by looking at the past.”

Ahmed Abdelaal

How do you see the crisis shaping for banks?

Pierre: We get very overwhelmed by what’s happening right now. It will end at one stage most likely whether we have vaccine or a proper treatment that’s likely to happen in a year. The EU is expected to contract by 13% but the rebound will be expected to be 10% next year. The debt impact of the protectionist measures is significant as it can affect individuals and companies, it can also be a major participant in shaping the speed of the rebound. Different countries have shut down parts differently, for example Italy let construction work to continue longer and this will have affected companies differently.

How do you cope with Italy being very interlinked with countries in the sense of the economy and how the banks are interlinked with different economies?

Pierre: Italy was the first in Europe to be hit by the crisis. The speed of the rebound for Italy is something to keep a close eye on as it will show us how effective the government policies are to achieve a rebound that is sustainable. There also needs to be a core focus on the debt to GDP. As contradicting as it may sound, the debt of Italy is very sustainable, looking at the cost of servicing debt, Italy  is 7% whereas in UK and Spain its 6% which is not very different and is very affordable. Doom loop is the story of the past, Italian banks have cleaned up their balance sheets and UniCredit has one of the highest buffers for capital ratio than any other banks in Europe, Net Profit ratio is also aligned with European banks. The banking system is now much more solid, real issue right now is the rebound of Italy next year and the government making sure the fiscal measures are there to support the economy.

The Flywheel and The Doom Loop

How long will the banks take to get back to normal?

William: Looking into long term effects is what will determine how the banks will come out of this crisis. Banks have come in much more resilient than during the GFC, they’ve been much less levered than during the year 2000 and in terms of equity and assets and banks are in a better situation. Safety net of banks that have to operate with give the market comfort which can weather the storm. William doesn’t think there will be an immediate need for capital in financial sector and not really in the long term.  Strategic question that this can pose are the exceptionally low interest rate environments which are a problem.

Will bigger capital buffer prove big enough this time to protect the banks?

Jayne-Anne: Take northern rock during the GFC as an example had its downfall due to its capital positions. 10-20 years ago, banks weren’t looking at capital ratios, now it is one of the most spoken of metrics, the banking sector has become much more responsible. The big banks are well capitalised and competent at judging capital competency and judging default chances as lots of data aids this process. The banks should have an obligation to go as far as possible and do the right thing as if they do the right thing now it will reward them in the future.

Why are you sanguine when looking at scary macro numbers?

William:  Some banks will go into crisis raising capital, some might be doing it coming out. But at the end of the day, most banks will survive and do okay. Current capital position has enough provisions present such as the credential value adjustment and other further buffers. In most banks these are fairly substantial and resilient  as a buffer. If we get a short sharp shock asset prices will tend to come back, the damage to real assets such as houses is likely to reverse in line with the economy. Now we need to see if there’s enough support measures, job retention schemes that secures income, fiscal supports that blunt some of the defaults and respond to and create the conditions for a recovery. Overall the level of support gives a good degree of confidence of the banks and that as a hole they will be okay.

Reasons to be optimistic?

Ahmed: “Countries can structure the future but can do nothing by looking at the past.” Working from home, we all continue to focus on business, but we call this business unusual. However, many corporations have the chance to turn the uncertainty into opportunities. We can build tech and data supply chains; banks will focus more on blockchain tech and revenue generating opportunities will allow firms to be more disruptive.

Will this create a softer form of capitalism?

Jayne: I’ve always had a belief that business should exists for society and for the better of the economy. Return on tangible equity will go down, we will be in lower interest rates for a long time. Big banks will become better at tech, being resilient and as a result business will focus on how to get the best for the consumer. We realise the inequality in the reward for those who are saving our lives, something has to change.